Edinburgh Investment Trust 23 February 2022
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Edinburgh Investment Trust. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Edinburgh Investment Trust (EDIN) has become leaner and meaner under lead manager James de Uphaugh and deputy manager Chris Field of Majedie Asset Management, who took over in March 2020. As we discuss under Performance, they have generated significant outperformance already, having created a more balanced portfolio intended to generate sustainable dividend and capital growth as well as income.
The underlying dividend was reset in the last financial year to four equal quarterly payments of 6p, which if repeated this financial year would annualize to a yield of 3.8%. As we highlight under Dividend, the yield under the previous manager was arguably unsustainable, and the payout unlikely to be grown in excess of inflation over the long term. The new Portfolio has less pronounced value characteristics, with more exposure to growth potential. James and Chris aim to find mispriced companies which can grow their earnings faster than the market expects, leading to dividend growth potential.
In September, the trust will receive a boost when old expensive debt finally matures and is replaced with debt that will cost over 5 percentage points less to service, increasing future total return potential. Structural debt is just under 9% of net assets at present, and the beta to the FTSE All-Share tends to be quite high (see Performance). That said, James has allowed some cash to build up in recent months as he is wary of volatility surrounding rate hikes and quantitative tightening. However, in the medium term, the managers believe the UK continues to be under-valued versus developed market peers and are finding opportunities in various industries, taking a contrarian view on some companies, as they have already done successfully since taking over the portfolio.
Edinburgh Investment Trust (EDIN) looks well set up to be a core savings vehicle for an investor who wants to generate a healthy income but places high importance on dividend growth. This is likely to include those who want to reinvest their income to benefit from the magic of compounding as well as those who expect to be drawing down their income for many years and therefore require growth to keep up with inflation.
James and Chris do have a tilt to value over growth, as is inevitable with an equity income portfolio, but this is not pronounced, and most of their holdings are classified as core. This means the portfolio is unlikely to be massively exposed to future stylistic shifts in markets, reducing one source of volatility. While James has not committed to maintaining this style bias, we believe it is likely to remain roughly consistent due to the focus on dividend growth as well as income.
Early results from the new portfolio have been good. The success has been built largely on stock-picking rather than sector calls, although building a significant position in mining stocks immediately after taking over the trust was a major contributor. In this call, the benefits of a patient contrarian approach were visible. The decision to buy ‘reopening’ stocks before the announcement of a successful covid vaccine is another good example. Of course, like any active approach, it may not always work to investors' advantage.
|Managers have track record of long-term outperformance
|Structural gearing can enhance losses in falling markets as well as gains in rising markets
|Focus on dividend growth should lead to attractive long-term income generation
|The UK market has little in some structural growth areas such as technology
|Low OCF, so offers low-cost access to UK equities
|Rebased dividend may not grow this year